Asian markets wary after Fed raises interest rates

The US Federal Reserve on Wednesday raised its benchmark interest rate by a quarter-point to 1 to 1.25 percent and said that another increase remains likely this year, despite the recent spate of weak economic data.

The U.S. Federal Reserve, acting as America's central bank, took another step towards normalising monetary policy, by increasing interest rates to a 1% to 1.25% range.

On Wednesday June 14, while trying to make it look like it clearly was telegraphing its intentions to cut its $4.2 trillion in holdings of Treasury bonds and mortgage-backed securities, the Fed left some bits of the process intentionally ambiguous.

Further, the rise in policy rate will also have a marginal effect on the Fed's balance sheet. The plan would involve halting reinvestments of the growing amounts of maturing securities.

"Initially, these caps will be set at relatively low levels - $6 billion per month, 5 for Treasurys and $4 billion per month for agencies". The dollar.DXY was largely flat against a basket of currencies after reversing earlier losses, while the price of gold fell.

Data released Wednesday showed that on a year-over-year basis, the core version of consumer price inflation, which strips out food and energy components, slowed for the fourth straight month, to 1.7 percent in May.

The dollar stood tall in Asia on Friday, on track for weekly gains against a currency basket, after upbeat U.S. economic data gave investors reason to hope the USA central bank will stick with its plan to hike rates.

They forecast US economic growth of 2.2% in Y 2017, an increase from the previous projection in March.

A retreat in inflation over the past two months has caused jitters that the shortfall, if sustained, could alter the pace of future rate hikes.

Weighing on Treasury yields and bolstering bond prices, the tepid inflation numbers outweighed traders' concerns over the Fed's announced quarter-point rate hike and plans to reduce its balance sheet this year. Inflation is thus moving away from the Fed's 2% target, as opposed to toward it. The Labor Department said its consumer price index dipped 0.1 per cent last month, weighed down by declining prices for petrol, apparel, airline fares, motor vehicles, communication and medical services, among others.

Yet the Fed's decision was over-shadowed by surprisingly weak USA economic data released before the rate announcement. It is bloated with the huge number of United States government bonds, or treasuries, and mortgage-backed bonds it bought in the years after the 2008 financial crisis in order to lower long-term interest rates and pump prime the economy with cash.

A gradual rate hike will put downward pressure on inflation, which can lead to stagnation in economic growth.

Minneapolis Fed President Neel Kashkari dissented in Wednesday's decision.

The administration's budget does expect the federal government's interest rate costs to rise, but that is due to the faster economic growth the program is expected to foster, Mulvaney said.

  • Zachary Reyes